The EU Corporate Sustainability Reporting Directive (CSRD) is a crucial component of the regulatory ecosystem influencing companies’ due diligence strategies. It works in tandem with the EU regulation on due diligence, the EU Corporate Sustainability Due Diligence Directive (CSDDD). Together, they aim to improve sustainability performance across all sectors in the EU.
This CORE Message delves into the CSRD, examining its implications and how it integrates with due diligence practices to foster a transformative approach.
What is the EU CSRD all about?
The Corporate Sustainability Reporting Directive is a regulation by the European Union aimed at enhancing and standardizing the way companies report on their sustainability efforts. This directive updates and expands the existing non-financial reporting rules, the Non-Financial Reporting Directive (NFRD), to ensure that companies provide consistent, reliable, and comparable information about their impact on the environment, social matters, and governance (ESG). The specific contents for reporting are determined by the European Sustainability Reporting Standards (ESRS). Companies are required to make comprehensive disclosures covering both environmental and social impacts as well as the financial aspects of their operations. This increased transparency is designed to give stakeholders, including investors, customers, and civil society, a clear view of a company’s sustainability performance. It’s about building trust and showcasing commitment to sustainable practices.
The CSRD came into force on January 5, 2023, and EU member states must implement it by mid-2024. For example, the German Federal Cabinet adopted the government draft to transpose the CSRD into German law on July 24, and the document was published on the website of the Federal Ministry of Justice.
Following a phased implementation timeline that spans from 2024 to 2029, the CSRD will apply to all large companies and all companies listed on EU regulated markets, except micro-enterprises[1]. It includes non-EU companies with substantial activity in the EU market, ensuring they meet the same reporting standards as EU companies. By 2029, the CSRD is estimated to affect about 50,000 companies worldwide.
How does the CSRD intersect with the CSDDD?
The CSDDD and the CSRD are complementary directives that collectively aim to improve corporate responsibility as part of the EU’s commitment to a sustainable business environment under the European Green Deal. Together, they create a comprehensive framework for sustainability due diligence, covering everything from identifying and assessing impacts to addressing and reporting on them. While the CSRD focuses on transparency and reporting, the CSDDD emphasizes the due diligence processes necessary to manage the impacts of businesses on the environment and people.
Given the overlap and intersecting requirements of the two directives, companies will find many common steps in how to best prepare to fulfil these obligations. Key factors to consider include:
- Regulatory Synergy: While the CSDDD focuses on the active management of sustainability risks within a company’s operations and their supply chains, the CSRD enhances how these efforts are reported and disclosed to the public. The ESRS’s detailed reporting standards provide the transparency needed to verify processes in line with the CSDDD’s due diligence obligations. For example, the EFRAG IG 1: Materiality Assessment Implementation Guidance[2] states that the materiality assessment of negative impacts is informed by the due diligence process defined in the UN Guiding Principles on Business and Human Rights (UNGPs) and the OECD Guidelines for Multinational Enterprises. These international standards also form the foundation of the CSDDD and other due diligence regulations. Furthermore, companies subject to the CSRD are exempt from reporting under the CSDDD[3].
- Coordinated Strategy and Implementation: The preparatory work for both directives, such as setting overall strategies and conducting risk assessments, will often overlap. Therefore, businesses must ensure that all relevant functions, such as their legal, sustainability, finance, procurement, and human resources teams, are working together to streamline efforts. For example, companies must determine how to assess the severity and likelihood of impacts across various topics for both directives’ objectives. This is essential for prioritizing actions under the CSDDD and disclosures under the CSRD. While sustainability teams can build on their experience with the UNGPs and OECD Guidelines to evaluate human rights impacts, other functions like risk management and legal teams may face new challenges in applying criteria focused on the severity of impacts on people and the environment, rather than business risks. Harmonizing processes and assessment criteria across the organization is crucial to prevent inconsistencies in action and communication.
- Transparency and Data: The CSRD requires companies to report on their due diligence processes concerning human rights, the environment, and governance. This means that if your business is already conducting human rights and environmental due diligence and has respective processes in place, it will have relevant data to integrate into the CSRD process. For example, utilizing the human rights and environmental risk assessment required for conducting meaningful due diligence can inform the impact perspective of the double materiality assessment required by the CSRD. Due diligence processes may begin with a broad, corporate-level evaluation of potential impacts, considering factors such as industry, geography, and business model. This approach is similar to the high-level analysis performed during a materiality assessment to identify likely impacts.
- Engagement with Stakeholders: Both directives mandate active engagement with stakeholders to collect information, assess risks, and understand the impacts of the company’s activities along the value chain. The CSDDD requires engagement with affected stakeholders (e.g., people impacted by business operations or their representatives) at several stages of the due diligence process. Insights from these engagements should inform a company’s reporting under the CSRD. These synergies should be considered because it is likely that, for both directives, engagement with a similar set of internal and external stakeholders is needed. An effective stakeholder engagement approach should build trust and avoid the need for duplicative information gathering.
In summary, businesses should seek ways to streamline compliance efforts between the two directives, leveraging synergies to develop a holistic sustainability strategy.
The CSRD goes beyond mere sustainability reporting.
The true potential of the CSRD lies in its ability to transform corporate practices. Issuing a sustainability report is just one element of a much larger, ongoing journey toward sustainable business transformation. Initially, the goal is to comply with the regulation by providing the necessary sustainability information promptly. However, the real value lies in how this information is utilized to reshape and evolve your business over the medium to long term.
Essentially, the CSRD is about much more than just reporting. Under the CSRD, companies must identify the ESG issues that are significant to both their organization and stakeholders. This involves explaining the impacts on people and the environment, recognizing related business risks and opportunities, and devising strategies to address them. Companies need to set relevant non-financial performance targets and implement action plans to achieve these goals, extending these efforts across the entire value chain. It will no longer be possible for companies to simply meet reporting requirements without actively working to reduce their sustainability impacts and mitigate risks.
Sustainability reporting is a tool to drive positive impact.
The CSRD is a pivotal development in corporate sustainability, emphasizing that reporting is not an end in itself but a means to drive meaningful change. Businesses that embrace the directive can enhance their preparedness for the CSDDD, position themselves as leaders in sustainability and leverage transparency to build trust, manage risks, and create long-term value.
The CSRD represents a transformative opportunity for companies to integrate sustainability into their core operations, paving the way for a more resilient and equitable future.
As technology continues to evolve rapidly, the task of merely reporting on sustainability can increasingly be handled by artificial intelligence.
However, if you’re aiming not just to report, but also to transform your business with meaningful due diligence processes that create positive impacts for the environment, people, and your company, reach out to us: hello@peopleatcore.com
Theresa for the CORE team
[1] For an overview of the timeline for the application of the reporting requirement, have a look at the CSRD set of Frequently asked Questions (FAQs) page 13.
[2] The implementation guidance is non-authoritative and accompanies the European Sustainability Reporting Standards (ESRS) issued by EFRAG.
[3] Art. 16 of the CSDDD
